Before Russia invaded Ukraine last February, Europe was by far the largest customer for the oil sales that give Moscow its wealth, even bigger than Russia's domestic market. But since European countries banned most Russian oil imports last year, Russia has had to sell more of it to other places such as China and India.
Yet Russia faces a dilemma. It can't pipe its oil to those places like it did to Europe, and its own tanker fleet can't carry it all. It needs more ships. But the United States and its allies also imposed restrictions to prevent tankers and shipping services from transporting Russian oil, unless it's sold at or under $60 per barrel.
Right now, Russia's flagship brand of oil, Urals, sells below that price. But that could change. So Russia would have to turn to a fleet of tankers willing to get around the sanctions to move its crude to farther locations in Asia or elsewhere. It's known in the oil industry as a "shadow fleet."
Erik Broekhuizen, an analyst at Poten & Partners, a brokerage and consulting firm specializing in energy and maritime transportation, says the shadow fleet consists of 200 to 300 ships.
"A lot of those ships have been acquired in recent months in anticipation of this EU ban," he says. "The sole purpose of these ships is to move Russian crude just in case it would be illegal for sort of regular owners to do so."
Broekhuizen says the use of shadow fleets is common practice and has long been used by Iran and Venezuela to avoid Western oil sanctions.
"So the Russians are just taking a page out of that same book and they're sort of copying what the Iranians and the Venezuelans did," he says. The main difference is Russia is the world's top oil exporter.
Most vessels in the shadow fleets are owned by offshore companies in countries with more lenient shipping rules, such as Panama, Liberia and Marshall Islands, says Basil Karatzas, CEO of New York-based Karatzas Marine Advisors, a shipping finance advisory firm.
"A ship, it could change its name. It could change its ownership while in transit," he says. "So you can have a vessel arrive in a port with a certain name, and by the time it reaches [another] port, it could be in the same vessel with a different name and a different owner."
Or they could surreptitiously move oil through ship-to-ship transfers in the middle of the ocean.
He says the owners running shadow fleet tankers have limited exposure to U.S. or EU governments or banks and so their fear of being sanctioned themselves is limited. Enforcement is difficult. Karatzas says the risk-reward ratio is favorable to the owners of the shadow fleet tankers.
"If you can make $10, $20 per barrel spread. And the vessel holds a million barrels of oil, you can make like $5 [million], $10 million profit per voyage," he says. "If you could do it five times a year ... you can see the economics of that."
Karatzas says shadow fleet tankers tend to be old and junky. But since the start of the Ukraine war, they've become highly valuable because of the cargo.
"In February 2022, a 20-year-old vessel was more or less valued at close to scrap," he says, adding that they can easily double in price. "Now these vessels are worth $40 million a year. Putin gave to the shipowners a very nice present."
Craig Kennedy, with the Davis Center for Russian Eurasian Studies at Harvard, says at the moment, it's legal for any ship to transport Russian oil because it's selling at prices below the cap imposed by Western countries. But if the price rises above $60 per barrel, then tankers will have to think twice.
"And suddenly the Greek tankers say, 'Hang on a second, your cargoes at $70. I can't touch it.' And Russia suddenly has no ships showing up," he says. Greek tankers carry about 70% of the world's crude oil.
Kennedy says Russia has a sizable fleet but can carry less that 20% of its seaborne crude oil exports.
"The Russians and the shadow fleet boats will remain. But the problem is they're not nearly enough to keep Russian exports whole," he says. "And so, the Kremlin will have to make a hard decision. Does it cut production or does it cut prices?"
Still, with such a highly lucrative business — and with a small chance of getting caught — perhaps more tankers could be lured into joining the shadow fleet.
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